Monday, April 24, 2006

Behavioral Economics 'Yes'; Fables About Adam Smith, 'No'

These pieces are well worth reading and while I have not yet read Professor Camerer’s professional articles, and cannot comment on them until I have, I want to comment on what he is reported to have said to Carolyn Meinel.

First his reported statement:

“In one sense, this isn’t a new idea. Camerer recently has argued that 18th-century economist Adam Smith, considered to be the father of freemarket capitalism, articulated many of the principles of behavioral economics in his book The Theory of Moral Sentiments. The difference is that Smith never linked his psychological insights into human nature with the moral pessimism set forth in his more famous book The Wealth of Nations.”

Next a couple of directed quotations from Professor Camerer:

“A: Economists uniquely have a very cynical attitude toward human nature — that people are basically selfish, which makes mathematical modeling easy. My goal has been to restore common sense over the wishful thinking that this simple model is adequate. The model of human nature used by classical economists is a shortcut. Their default thinking is that people care only about themselves.”

“In his early years, however, Camerer was the odd man out amid a widespread belief in “economic man,” a concept first expressed by Adam Smith in his 1776 work An Inquiry into the Nature and Causes of the Wealth of Nations. “It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner but from their regard to their self-love,” Smith wrote. Economists enlarged upon this hypothesis with the concept of economic man — a totally rational and purely selfish being — and assumed that everyone fits this model.Perhaps the most bemusing thing about the power of Smith’s “economic man” was the fact that earlier, Smith himself had been on the other side of the debate. According to Camerer, Smith’s book The Theory of Moral Sentiments, published in 1759, was “bursting with insights about human psychology, many of which presage current developments in behavioral economics.” However, economists ended up taking their cues from Smith’s later views. “

CommentI do not recognise Professor Camerer’s representation of Adam Smith’s views in these reported statements, though I do recognise them as assertions about Smith’s views as commonly circulated in US academe and through into each generation of graduates in economics. They also happen, in my view to be wrong.

For example, the assertion that Adam Smith is ‘considered [by who?] to be the father of freemarket capitalism’, is historically incorrect. Smith wrote about a much more modest commercial society and had no knowledge of ‘capitalism’, a 19th-century development and one not present in the mid-18th century, unless the definition of capitalism is broadened beyond the usual toleration common among economists fluent in maths.

Of greater import is Professor Camerer’s misinterpretation of Adam Smith’s alleged discrepancy between his ideas as represented by his ‘Theory of Moral Sentiments’ (1759) and his ‘Inquiry into the Nature and Causes of the Wealth of Nations’ (1776). Allegedly, Professor Camerer finds this alleged discrepancy ‘bemusing’.

I see no reason for Professor Camerer to be bemused. It happens to be wrong because neglects the fact that while Professor Smith was teaching moral sentiments at Glasgow University between 1752 and 1763 (the substance of which from his ethics class became his book ‘Moral Sentiments’, (1759) he was teaching in his lectures in Jurisprudence much of which became his ‘Wealth of Nations’ (1776). The difference in dates was not caused by later changes of mind – there were none – but only the labour of writing them. For Smith these two subjects were interwined and almost simultaneously conceived and developed by him.

The fact that some German economists in the 19th century, who did not have access to his lecture notes, as transcribed by students in enough detail to find whole passages almost word-for-word the same as those sections in ‘Wealth of Nations’ that appeared in 1776, was unfortunate for their argument (still known today as ‘Das Adam Smith Problem’ because it keeps being resurrected; I am sorry to see a distinguished scholar repeating the fable as if the contrary evidence did not exist).

Nevertheless, these ill informed economists created the ‘Das Problem’ fable , namely that the ‘early’ Smith was different from the ‘later’ Smith, in clear breach of the evidence that became available when one set of student’s notes was discovered in 1895 and became the property of Professor Edwin Cannan (Lectures on Justice, Police, Revenue and Arms, delivered in the University of Glasgow by Adam Smith, Oxford University Press, 1896) and another set was discovered by Professor John M. Lothian in 1958. Both set of notes were published as Lectures in Jurisprudence in the Glasgow Edition of Adam Smith’s Works and Correspondence, edited by R. L. Meek, D. D. Raphael and P. G. Stern, by Oxford University Press in 1978 (also available in a low price edition from Liberty Fund, Indianapolis, Indiana, 1982).

But what of the substance of Professor Camerer’s latest resurrection of Das Problem? He is reported to assert: ‘“economic man,” a concept first expressed by Adam Smith’. I was surprised to read this because homo economicus is associated with modern economists and is quite alien to Adam Smith’s perceptions of human motivation.

Professor Camerer’s evidence for his resurrection is the famous quotation from ‘Wealth of Nations’:

“It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, [not to their humanity] but from their regard [to their own interest. We address ourselves, not to their humanity but] to their self-love,” Smith wrote’.

[WN I.ii.2: pp 26-27; minor punctuation and omitted words restored.]

There must be more than this to his evidence? But until I read the academic articles listed in Professor Camerer’s home page I shall confine my remarks to the quotation he offers. For a more extensive examination of this paragraph I refer you also to my ‘Adam Smith’s Lost Legacy’ (Palgrave Macmillan, 2005, chapters 22-25 pp 101-114).

Smith’s rendering of this paragraph in his Lectures in 1763 is as follows:

‘Man continually standing in need of the assistance of others, must fall upon some means to procure their help. This he does merely by coaxing and courting; he does not expect it unless he can turn it to your advantage or make it appear to be so. Mere self-love is not sufficient for it, till he applies in some way to your self-love. A bargain does this in the easiest manner. When you apply to a brewer or butcher for beer or beef you do not explain to him how much you stand in need of these, but how much it would be in [his] interest to allow you to have them for a certain price.’ [LJ(A) vi.45, 1763]

To fully understand the richness of this passage it requires familiarity with his ‘Moral Sentiments’ (1759), the class for which he was teaching with his class in Jurisprudence (i.e., much the same audience around the same times). In fact, I would assert that neither book can be properly understood on its own.

Self-love was insufficient and nothing about it would get anybody what they wanted by relying on that alone. The language of a Smithian bargain is quite clear on the subtlety of his blending into ‘Wealth of Nations’ the concepts of ‘Moral Sentiments’ (the next sentence comes right after the words from his Lectures, as reproduced in ‘Wealth of nations’):

‘Give me that which I want, and you shall have this which you want, is the meaning of every such offer; and it is in this manner that we obtain from one another the far greater part of those good offices which we stand in need of’.

Self-love and self-interest in Smith are not synonymous with ‘selfish’ as apparently used as a category in psychology (perhaps they should re-look at their polar categories of ‘selfishness versus altruism’). Professor Camerer rightly accuses mathematical economists, who see ‘self’ as the driving motivation of ‘economic man’ (after all it is their creation and not Smith’s!) doing so (only?), because it ‘made mathematical modelling easy’, which I would add has little relevance for Smithian political economy. I am sure the construct of ‘economic man’ did maker it easier, but Smith never used mathematics in his subject (though, for an 18th-century professor of Moral Philosophy, he was an accomplished mathematician), and he did not have such a creature as economic man’ anywhere within his works. (See Professor Fleischacker’s erudite explanation of why Smith did not hold to such a model: ‘On Adam Smith’s Wealth of Nations: a philosophical companion’, Princeton University Press, 2004).

In bargaining – the main interaction of all trading activities – the self-interests of one party must be mediated by consideration of the self-interests of the other party (and vice versa). Two selfish, self-loving, psychopaths would never conclude a bargain and nor would two ‘economic men’ who sought only their own self-interest without considering the other’s self interest too (Professor Stigler got this wrong too, as did from a different perspective did John Nash). And the process by which they mediate their self interests is embedded in both ‘Wealth of Nations’ and ‘Moral Sentiments’ too. See TMS I.i.3.2: p 17; I.i.4.5: p 21 and crucially I.i.4.9-10: p 23. The last I shall quote from here:

‘We expect still less sympathy from an assembly of strangers, and we assume, therefore, still more tranquillity before them, and always endeavour to bring down our passion to that pitch, which the particular company we are in may be expected to go along with.’

As I argue in ‘Lost Legacy’ (pp 109-10), that sentence of Smith’s, and its preceding argument, describes closely the process that occurs in negotiation by which parties who start with two different solutions to a bargaining problem find their routes to a single, joint solution by mediating their differences and taking account of what they have to say and do to modify their first solutions before reaching their last joint solution. If they don’t so modify in this manner they will not get their dinner and the ‘butcher, the brewer and baker may not get their dinners either. For my account of modern bargaining based on Smith's conditional proposition ('If you- Then I') see my 'New Negotiating Edge: a behavioural approach to results and rleationships', Nicholas Brealey, 1997 (available from www.negotiate.co.uk).

I think if mathematically-minded economists were to study the arguments of real bargainers a little more than the arguments of their functions they would see what Smith was getting at. And, if I may opine, with the greatest of respect to psychologists, if they were to read Smith more closely, and be less concerned with proving their credentials as a ‘harder’ science, an attribution wrongly credited to mathematical economics, they would not fall for the old fallacies of the ‘Das Adam Smith Problem’.

Having said all this, let me end by stating that apart from these observations, I think Professor Camerer is on the right track with behavioural economics and it is one that I am more than willing to travel along with him, except I do not intend to carry the same baggage he carries in regard to Adam Smith. Meanwhile I will start reading what I can find of Professor Camerer’s work.